Crisis of statism, not capitalism

In search of that magic money tree

t might not have been the ‘crisis of capitalism’ which some have been waiting so long for, but it is widely thought that the last few years certainly represent a “crisis of capitalism”. But if you think of capitalism as a system whereby profits and losses acting unhindered by the hand of government guide capital to its most productive uses, this is difficult to sustain.

The sectors which blew up and took the rest of the economy with them were riddled with intervention. Banks have their capital adequacy rates set and their bad investments covered by government. The housing market is kept inflated with all manner of tax breaks and politically motivated distortions like Fannie Mae, Freddie Mac, and the Community Reinvestment Act. Behind it all interest rates are set by a small panel of political appointees, much as the price of alum keys was set in the Soviet Union.

But as we see violence on the streets of Athens and Madrid, the Occupy protests in the United States, and unadulterated rage on the pages of The Guardian’s Comment is Free (Cif), there is certainly some sort of crisis afoot. It is, however, a crisis of big government.

Over the last few decades governments throughout the western world have made extravagant spending commitments. In Ireland the welfare budget was tripled. In Greece pastry chefs, radio announcers, hairdressers, and steam bath masseurs were included among 600 professions deemed so “arduous and perilous” that workers could retire at 50 on a state pension of 95 percent of their final salary.

But it wasn’t just small basket case economies doing it; big basket case economies were doing it too. France decided that its workers could work no more than 35 hours a week and still generate the wealth to pay for everyone to retire at 60 and spend a third of their lives as state pensioners. In the United States the Bush administration launched the largest expansion of Federal spending since Lyndon Johnson’s Great Society program of the 1960s. In Britain the Labour government increased spending by more than half in six years.

As long as you didn’t look either too closely or too far ahead, these massive spending commitments looked just about affordable as long as there was plenty of money to spend. And there was. In Britain tax receipts rose by 40 percent between 2001 and 2007. In the United States, Federal tax revenues rose by 30 percent between 2000 and 2007. French tax revenue increased by 30 percent between 2002 and 2008.

But these were the effects of the bubble. These were taxes swelled by property values, house sales, and bank profits on those house sales and the myriad ancillary transactions such as securitisation. With the bursting of that bubble that wealth is gone, if it was even there in first place, and it is not coming back. Nor should it.

That does mean, however, that lots of the extravagant government spending promises made before the bust now stand revealed for what they are; unaffordable in the absence of bubble taxation. And given the undesirability of bubbles, that just makes them unaffordable full stop. No amount of general strikes, protesting, occupying, or posting on CiF will change that. We do not have a mighty oak of a money tree, but a bunce bonsai and, in truth, that’s all we ever did have.

Since the crisis hit we have seen both the unavoidability of this truth and the reluctance of electorates to accept it. In the last few years the voters of Greece, Spain, and France have voted out ‘austerity’ governments only to have ‘austerity’ visited upon them anyway by their replacements (at least they were asked, unlike the Italians). There is a very good chance that this November and in May 2015 the voters of the United States and United Kingdom will discover that reality doesn’t just disappear because you tick a box marked ‘Obama’ or ‘Miliband’.

The amount of money spent by the government has grown inexorably. We have reached its limit. In Britain, since 1964, whether top rates of tax have been at 83 percent, as in the 1970s, or 40 percent, the percentage of national income paid in taxes has never exceeded 38% of GDP.

Whatever the designs of the politicians, the social democrats, the Labour party, the Guardian, or Polly Toynbee, the British people, collectively and unconsciously, seem to have decided that they are not willing to fund a state sector any bigger than this. When the share of state spending as a share of GDP reaches 45 percent or 50 percent, as it has recently, the only way is down. That is where we are now.

If the extravagant spending promises of politicians outstrip both the capabilities of even a well-functioning capitalism to generate the necessary wealth and the public’s willingness to pay for it, that is not capitalism’s crisis, but a crisis of big government. Its time is up.

This article first appeared at The Commentator

A profligate president

“C’mon, let me drop you home”

Bearing epithets such as “prudence”, “capability”, and “the Iron Chancellor”, there was once a time when Gordon Brown was taken very seriously indeed. Now, an economic collapse later, his reputation is shot and his book about the global economy after the credit crunch can be found at the bottom of bookshop bargain bins for a distinctly deflationary £2.99.

George W. Bush, by contrast, was rarely taken seriously. Bush himself was aware of his limitations (and to preempt the obvious jokes, that’s something more politicians could do with) and gave a longer leash to subordinates like Dick Cheney and Donald Rumsfeld than either his predecessor or successor.

The same applies in The 4 per cent Solution: Unleashing the Economic Growth America Needs. Bush has not written a book about the global economy after the credit crunch; instead, ever the CEO, he has assembled a collection of leading economists and got them to write one. So we have Nobel Prize-winning economist Robert Lucas on economic growth past and present, fellow Nobel laureate Gary Becker on immigration (and Standpoint contributors Amity Shlaes and Michael Novak on, respectively, Calvin Coolidge and the moral superiority of free markets).

The puzzling thing is why Bush ignored all this when he was in office. There is a chapter on sound money when, with White House encouragement, base money in the United States grew by more than 33 per cent between 2001 and 2005, fueling the housing boom. There is a chapter on sound government finances when Bush turned Clinton’s budget surpluses into deficits with the largest expansion in Federal entitlement spending since Lyndon Johnson’s Great Society.

The irony is that Brown, a man once taken so seriously, produced such a squib of a book, while Bush, a man widely seen as a nincompoop, has produced something much more substantial. If only he’d acted on this wisdom before the event.

This article originally appeared in Standpoint

It’s anything but the economy, stupid

Wrigley Field, Chicago, 2040 AD

Walking around the ruins of the old Roman town of St Albans can make you feel like Shelley’s “traveller from an antique land”. As you look down into the remains of the Roman amphitheatre, where the town’s inhabitants flocked in the second and third centuries AD, you wonder what those people thought and talked about as Roman Britain approached its collapse.

You’d like to think they talked about that looming collapse. Perhaps they did. It was, after all, the existential issue of the day. But looking at behaviour in another, contemporary, troubled great power, you do wonder.

The United States government hasn’t balanced its budget since 2001. In the past ten years, starting in 2002 when Republicans controlled the Congress and the White House, Federal government debt has more than doubled from $6.5 trillion to over $15 trillion, or nearly $51,000 for every US citizen. Since September 2007 that debt has been increasing by nearly $3.9 billion a day. The Congressional Budget Office reported last week that in 2012 the Federal government’s debt increased by over a trillion dollars for the fourth year running.

Over the same ten year period the dollar has lost about 25 percent of its value. The rampant credit creation of the Federal Reserve which fuelled the housing bubble has created $1.4 trillion of new base money since 2000. At the moment most of this is sitting on banks’ balance sheets but if it emerges into the wider economy the US will have an inflation crisis.

Likewise, if the foreigners who hold nearly a third of America’s debt decide to dump these depreciating assets, the dollar will collapse.

These are the existential issues for the United States as November’s presidential election nears. But to look at the media you’d never know it.

Instead the American media has lately been preoccupied with a fast food chicken chain. More precisely, it has been preoccupied with what the president of that chain thinks of gay marriage.

“Who cares?” might have been the appropriate response. If you’re a Chick-fil-A shareholder and you don’t agree with him, sell up and invest somewhere else. If you’re a customer, go and buy your artery clogging food down the street. Capitalism, more so than any other system, gives you scope to exercise your morality.

Instead the views of one guy became a minutely discussed national news event. Democrats in a number of cities called for local branches of Chick-fil-A to be shut down, a curious course of action in the face of high unemployment. Supporters of Dan Cathy’s views had a Chick-fil-A Appreciation Day where they filled their faces to show solidarity. They should have called it Cholesterol for Christ.

Then, last week, media attention fixed upon the previously little known Republican Representative from Missouri, Todd Akin. In an interview with a local TV station Akin aired the unusual view that women couldn’t become pregnant through “legitimate rape”.

Worryingly Akin sits on the House Science Committee. This provides yet another argument for leaving more to free markets and less to government. Under free markets science ends up in the hands of people like Bill Gates and Steve Jobs. Only government could put someone like Akin in charge of science.

Neither gay marriage nor rape should be belittled as issues. Laurie Penny, not someone I’m given to quoting approvingly, noted in a moving blogpost that between ten and twenty percent of women in America have experienced rape, 90,000 in 2008 alone. This is awful and ought to be tackled.

But neither should silly remarks from a silly man like Todd Akin drown out the great existential issue in American politics: the economy.

And America’s solvency ought to matter to everybody. It ought to matter to Democrats who care about redistribution of wealth: watch your economy disappear over a cliff and then try and redistribute nothing; see how far that gets you.

It ought to matter to neo-conservatives: America’s economic wellbeing is a sine qua non of American strength. The United States did not become rich because it had powerful armed forces; it got powerful armed forces because it was rich. If the wealth goes so does the power.

And, most importantly, it ought to matter to every ordinary American citizen who will suffer if the economy continues on its current, Hellenic path.

But instead of this discussion we have the ongoing row about Mitt Romney’s taxes. With unemployment stuck above 8 percent and poverty at record levels, Obama’s supporters are trying to turn an election that should be about how much money Americans have in their pockets into one about how much money Mitt Romney has in his.

President Obama’s economic track record has been dismal so you can’t blame him for running away from it. Bill Clinton’s strategist James Carville famously said it was “The economy, stupid” but Obama and his supporters are desperately trying to shift the focus of this election to anything but. And the Republicans have been lead-footed enough to let them.

Ultimately, Americans have a decision to make. What matters most: Tax returns or job reports?

This article originally appeared at The Commentator

Mea Culpa

The guilty men

I find it very difficult to say anything bad about the Republican party. After all, this is the party which was founded to eliminate the original sin of the United States; slavery. It is the party which fought the racist Jim Crow laws of the southern Democrats and pushed, against opposition from Democrats in Congress, for an anti lynching bill. It is the party which, through Robert Taft, Barry Goldwater and Ronald Reagan, stopped the onward march of collectivism, proved Marx’s ‘laws of motion’ to be the fantasies they were and defended the liberal freedoms of the enlightenment.

But the GOP is going to have to offer up a few mea culpa’s. The mid terms of 2010 and the Presidential election in 2012 are likely to be focused on the dire state of the American economy. If the GOP are to fight the spendaholic suicide of the Democrats in the White House and Congress they need to make a confession; they are partly responsible.

In 2001 the American economy was reeling from the twin shocks of the bursting of the dot com bubble in stocks and the 9/11 attacks. As a new book by Charles K Rowley and Nathanael Smith* shows, during the 1980’s the tight monetary policy of Paul Volcker’s Federal Reserve offset the loose fiscal policy of the Reagan deficits. In the 1990s, by contrast, the loose monetary policy of the Greenspan Fed was offset by the tight fiscal policy of the Congressional Republicans. “So, in the two decades before 2000”, Rowley and Smith write, “fiscal and monetary policies tended to offset each other, and were never both expansionary at the same time.”

In reaction to the shocks of 2001 this was changed. Bush Jnr embarked on a massive program of Keynesian stimulus spending. From a budget surplus of $236 billion in Clinton’s last year in office the Federal budget plunged into deficit to the tune of $413 billion in 2004. As is commonly held, this was not the result of tax cuts. As Rowley and Smith point out “Tax revenues and social insurance contributions in 2007, at $13,866 per capita, were higher than their 2000 levels”. From 1992 Federal spending per capita held steady at $12,500 per annum. From 2001 it began climbing by 2.45% per annum climbing to nearly $15,000 in 2008….Dick Cheney defended the ballooning deficit with the ludicrous assertion that “Reagan proved deficits don’t matter”. But, as we’ve seen, Reagan’s deficits were offset by the monetary tightness of the Federal Reserve. No such restraint was offered by Alan Greenspan. Over the course of 2001 the Fed Funds Rate was repeatedly slashed from 6.25% to 1.75%.

These Keynesian mistakes led directly to the current mess. From mid 2004 Greenspan began trying to mop up some of the money he had sprayed around to soften the landing of 2001. By mid 2006 the Fed Funds Rate was back up over 5% and many Americans, who had taken on the adjustable rate mortgages Greenspan himself had recommended in early 2004, found themselves unable to keep up repayments. The rest, as they say, is history.

Out of simple honesty the GOP needs to acknowledge the disastrous economic policies of the Bush administration. But aside from offering up a dose of humility which could be a welcome tonic to the hubris and arrogance of Obama, Pelosi and Co, this would offer an opportunity for the Republicans. When looked at more closely we see an object lesson in the downside of crude Keynesianism and a warning of a grim future stemming directly from this administrations woefully misguided policies.

Bush’s expansionary fiscal stance was mild compared to Obama’s eye watering $1.6 trillion deficit forecast this year. The Fed Funds Rate, at a range of between 0% and 0.25%, is lower than even Greenspan dared go. And we saw where that got us. The recession of 2001 – 2002 was one of the shallowest on record but this was bought with Keynesian policies at the price of the greater meltdown we face now. But then Keynes himself, the intellectual giant so much back in vogue, simply shrugged his shoulders when faced with this and famously declared “In the long run we are all dead”.

Well Keynes might be but we are stuck with the fallout of such glib, short termist thinking. The philosopher George Santayana wrote “Those who cannot remember the past are condemned to repeat it”. Remembering the doomed Keynesian policies of the Bush administration might be difficult for Republicans going into elections. But if the American economy is going to return to the growth and job creation which is the source of real, long term prosperity, the failure of these policies needs to be highlighted. And if they can prove they have learned from their mistakes, the GOP might be best placed to make the case.

* ‘Economic Contractions in the United States – A Failure of Government’ by Charles K Rowley and Nathanael Smith

Capitalism in crisis?

Leader of the French student protests of 1968, Daniel Cohn-Bendit, recently emerged to declare “This financial crisis is for capitalist neo-liberals what Chernobyl was for the nuclear lobby”. Is it?

It’s important to note that we have been here before. Events like the Tulip Mania of 17th century Holland and the South Seas Bubble in Britain in the 18th century were what Karl Marx was referring to when he described the “commercial crises that by their periodic return put the existence of the entire bourgeois society on trial” back in 1848.

But it is capitalism that survived while the socialist alternative, tested to destruction in the Soviet Union, was consigned to Trotsky’s ‘dustbin of history’. This is because of its inbuilt mechanism for self correction which is what we are seeing now.

Capitalism, like socialism, is a philosophy of the creation and distribution of economic resources. In theory, capitalism directs resources to where they will generate the maximum economic return and with this increase in wealth wider society will prosper. But when these economic resources are directed towards enterprises which do not maximise return the market will pull them back and reallocate them. The initial contraction is painful, but the long run result is greater prosperity.

This is why George W Bush is wrong when he said “The market is not functioning properly” in his Presidential address. He was referring to the need for the US Congress to pass his bail out plan for the US banking industry.

US banks have made huge profits over the last few years lending money to people who were only marginally able to pay it back. These sub prime borrowers could only get into the market because, by 2004, the Federal Reserve had slashed interest rates to 1%. With inflation of around 2%, it paid to borrow. This was the period of misallocation.

But when this sub prime market fell into chaos it took the bankers who had feasted off it down too. Banks like Lehmann Brothers had billions of dollars of these sub prime loans on their balance sheets as assets. But when the repayments dried up the banks were left with properties they couldn’t sell and, as assets, their value collapsed and their balance sheets were spattered with red ink. This is the painful contractionary phase of the righting mechanism of capitalism.

But the plan Bush has put before Congress proposes spending $700 billion of taxpayers money in buying up these assets to enable ‘Wall Street’ to get back to providing credit for ‘Main Street’ to take out new mortgages in Florida or Michigan. By chucking a wrench into this self righting mechanism the Bush administration will ensure that economic resources will stay locked up in this unproductive economic enterprise.

It also means that the re-allocation towards more profitable areas will not happen. Despite what Bush says, echoing Cohn-Bendit and Marx, it isn’t the functioning of markets but of government interference which may cause greatest long term harm.

(Printed in London Student, vol 29 issue 2, 06/10/08)